Effects of Restaurant Franchising: Does an optimal franchise proportion exist?

January 22Suh-hee Choi

HTM 681 2nd ArticleSpring 2009

Hsu, L., & Jang, S. (in press)

Does franchise influence a

restaurant firm’s performance?

franchiseVs.

non-franchise

Does optimal franchise proportion exist?

profitability

intangible value

Alon et al., 2004

Bradach, 1997“marginal costs= marginal benefits”

Resource scarcity theory (Hunt, 1973; Norton, 1988; Oxenfeldt & Thompson, 1968, Oxenfeldt & Kelly, 1969)

Agency theory (Rubin, 1978)Theories

Other things being equal

ResearchQuestion

s

Research based onthe empirical evidence

Spinelli et al., 2003; Aliouche and Schlentrich, 2005

• reduces investment cost / risk • disadvantages

Organizational learning theory (Sorenson & Sorenson, 2001)

Methodology

http://www.sec.gov/cgi-bin/browse-edgar?company=&match=&CIK=&filenum=&State=&SIC=5812&owner=include&action=getcompany

Methodology

Dependent variables

• ROA

• ROE

• Tobin’s Q

AssetsTotal

IncomeNet

_

_

EquityrStockholde

IncomeNet

_

_

assetstotal

deptbvsinventorieofbvassetliabilitystockofbvstockofnpriceshareTA

DEBTPSMVE

_

)___()__()__()_(

Methodology (cont.)

Independent variables• franchise proportion

• Controlled variables• leverage• firm size (economy of scale) • advertising • profitability (in Tobin’s Q model)

outletsofnTotal

outletsFranchised

___

_

Methodology

• T-test• compare the means between franchise / non-franchise ROA(ROE, Tobin’s Q

• Regression analysis

dummyFranchise

ADSIZEDEBTROEROA

_

)(

4

3210

Methodology

• Regression analysis

2

54

3210

%)(%

)(

FranchiseFranchise

ADSIZEDEBTROEROA

2

62

54

3210

%)(%

_'

FranchiseFranchiseAD

SIZEDEBTROAQsTobin

• normality natural log transformation• multicollinearity • heteroskedasticity

Results descriptive information

Results franchise vs. non-franchise

• profitability and intangible values are significantly higher in franchise firms than non-franchise firms

Results franchise vs. non-franchise

H1: Franchise restaurant firms have higher profitability and create more intangible value than non-franchise restaurant firms.

Results effects of franchise proportion

H2: There is non-linear relationship between franchise proportion and profitability and intangible value.

Results effects of franchise proportion

shaped

maximum ROA (ROE, Tobin’s Q)?

Results geography matters

• less dispersed max: 35% 36%

not significantsq% coefficient:negative linear

relationship

Results geography matters

• dispersed hard to monitor more franchising max: 52% 55% 43%

Conclusions

• Franchising betters financial performance / intangible value.

• Optimal proportions of franchising can be found (to maximize financial performance / intangible value).• other factors of optimal proportions might be

significant : geographical dispersion was tested.

limitations

• Didn’t include positioning and marketing concepts.

• Focused only on restaurant industry. • Limited data available (what about small

franchisors?)

Further studies

• Develop methodologies to find optimal points that consider both maximizing profits and reducing risks at the same time (e.g. Agency Theory (Rubin, 1978))

• What happens if OTHER THINGS ARE NOT EQUAL?

• Other benefits of franchising?• social values• sustainable relationships between the firms